2016:Another difficult year awaits Zimbabwe

As 2015 draws to a close, I reflect on what has been yet another disappointing year for Zimbabwe and consider what 2016 may bring for the people of this country.

The Ritesh Anand Column

While government expects the economy to grow by 2,7%, I expect GDP to decline by at least 3% in 2016. This is especially disappointing following the period 2009-2012

when the country achieved an average growth rate of 11% per annum. Since then, growth has stalled and the economy faces significant headwinds going into 2016.

Against a background of weak domestic demand, tight liquidity conditions and the sharp appreciation of the US dollar against the South African rand, inflation remained

negative in 2015, and it is projected to remain low in 2016. Industrial capacity utilisation continues to decline, and is estimated at 34,3% owing to underproduction

and lack of competitiveness. Zimbabwe’s implied real effective exchange rate is currently over-valued by an estimated 45%. This largely reflects the progressive

appreciation in the US dollar, underpinned by strong economic recovery in the United States and accommodative monetary policy measures adopted in most Euro Zone

countries.

As a result of increasing demand for imports and dwindling exports, the external sector position is under severe pressure, with an estimated current account deficit of

around 17,4% in 2015. The recent sharp decline in the South African Rand against the US dollar will only make the situation worse going into 2016.
The economic recovery in recent years has been underpinned by the mining and agriculture sectors, which accounted for 93,5% of export revenues between 2009 and 2013.

Mining, which made up 65,2% of export earnings over the same period, is a typical enclave sector, with weak linkages to the rest of the economy. It is also capital-

intensive, with limited employment creation opportunities. Following the slump in commodity prices the outlook for the sector remains uncertain with a number of mines

expected to close in 2016. Perhaps we placed too much reliance on the recovery in the mining sector to drive growth. Unfortunately, commodity prices are expected to

remain low for sometime due to the slowdown in China.

Economic growth slumped in 2015 on the back poor performance in the agricultural and mining sectors. It is unlikely that the situation will improve in 2016, following

the poor and erratic rainfall and depressed commodity prices. According to the Chamber of Mines, the mining sector continues to operate below capacity amid a host of

challenges, including depressed metal prices, lower capital and foreign direct investment inflows, high cost structures, sub-optimal royalties and power shortages.
Production in the manufacturing sector is expected to decline further due to import competition and the financial problems of local firms. Manufacturing sector

activity continues to be weighed down by outdated plants and machinery, cheap imports, the high cost of production and liquidity constraints.

Capacity utilisation declined 2,2%, from 36,5% in 2014 to 34,3% in 2015, levels last seen in 2006. Erratic power supplies, lack of capital, higher input costs,

obsolete machinery and dilapidated infrastructure have all constrained capacity utilisation. I expect capacity utilisation to fall further in 2016 to below 30% due to

ongoing power shortages and overvalued currency.

The stock market, which is a good barometer of investor sentiment, declined 30% this year, while the Mining Index fell by 73%, the biggest fall since 2009. Market

turnover declined more than 40% from US$483 million in 2014 to less than US$250 million in 2015. In the absence of a catalyst, I expect the market to decline further

in 2016 as investor sentiment wanes.

Zimbabwe’s external debt continued to expand in 2015 to US$7,2 billion or 50% of GDP. However, Zimbabwe has made significant progress in resolving Zimbabwe’s

outstanding debt through re-engagement with the international community. It is envisaged that the settlement of external payment arrears by government amounting to US

$1,8 billion owed to multilateral creditors, would be completed in the first half of 2016.

The debt arrears clearance programme agreed to by the International Financial Institutions, and supported by development partners in Lima, will go a long way to unlock

new financing for Zimbabwe.

Re-engagement with the international community is likely to reap further benefits in 2016 as Zimbabwe seeks to improve its relationship with the West. While the

country has adopted a look East policy, its important we do not ignore the West which remains an important source of foreign direct investment.

Zimbabwe needs to focus on creating a conducive environment for investment. In this regard, the establishment of a special task force to focus on Zimbabwe’s rankings

in the World Bank Doing Business index is welcome. The visit by China’s President Xi Jinping in November, the second in almost 20 years, is significant and re-affirms

the country’s long-standing relationship with China. In this regard, its important to remember that while China is our close friend and ally, it’s a not a charity.

China primarily seeks to maximise the value of their investments across the continent and Zimbabwe is no exception.

Despite the economic challenges, 2015 has been a year of progress.

Re-engagement with the international community accelerated in 2015, culminating in the Lima discussions.

The state visit by Xi re-affirmed China’s commitment to Zimbabwe, and the commitment towards improving Zimbabwe’s rankings in the WB Doing Business Index are all bold

and positive developments. However, much more needs to be done to restore confidence in the economy. The overall economic outlook in the short-term is somewhat

depressing due primarily to the continued liquidity crunch, policy inconsistencies and the unsustainable external account and debt situation.

Government needs to implement policy reforms to ease the high cost of doing business,achieve fiscal and external sustainability, reduce financial weaknesses and unlock

Zimbabwe’s true potential. 2016 will be another difficult year for Zimbabwe unless government embraces reform.